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How much tax will I pay? UK tax advice for Business Owners


Hi, I’m Graham from Inca Chartered Accountants.
One of the questions we get asked most frequently from our clients — “How much tax will I pay?”
Well, as soon as your accounts are done we will know to the penny, but of course that
may happen several months after your financial year end. And it’s great to have an idea of
how much tax you are likely to pay well in advance of that. So what I’m going to show
you is a way to estimate your tax liability. It is only an estimate. We won’t know for
sure until your accounts are done but it will give you something as a guide as you look
ahead through the course of the business year. The amount of tax you pay is dependent upon
the type of business you operate. So in this video we are going to look at the two main
types — the sole trader and the limited company. If you are a sole trader you can earn roundabout
£7,500 a year in profit, not sales, that’s your sales and then take off your costs and
your not going to pay any tax on that money. But as soon as you go above that level you
are going to start paying tax at a rate of 20%, the same as somebody in employment. But
you are also going to have Class 4 National Insurance. Now that kicks in at 9% making
your total tax hit 29%. Now the Class 4 National Insurance is interesting because people think
my National Insurance – I get a pension, I get hospital cover. Yes, you have already
paid for that in a direct debit that goes out of your account every month. This is just
tax. You do not get any extra benefit from having paid it. So in order to work out how much tax you have
to pay we need to look at your profit month-on-month. You take your sales, subtract your costs,
not your drawings, that’s money you take out. Put them to one side for the moment. Once
you have got that profit situation in place, £600 every month that’s yours free, nothing
to worry about. But after that £600 you need to put nearly a third away. That is one third
for the government, two-thirds for you. Stick it in a cash ISA. It gets paid in January
of each year, but be careful because you may also have what is known as a payment on account
if your tax bill is high and that’s going to kick in, in January and July . Now the Limited Company is completely different
because you are not taxed. It is the company that is getting taxed. And the company does
not have any tax free amount that it can earn year after year. Company pays tax as soon
as it makes £1 of profit and it pays tax at a rate of 20%. That’s 20% on all its profits
way up to a quarter of a million pounds approximately. Now that’s a 9% saving for most average earners.
That’s most significant. A company has to pay its tax 9 months after its financial year. So calculating it. You take your sales subtract the expenses
the business incurs. That’s your costs, salary perhaps, supplier invoices and that gets you
your profit before tax comes off. Then put 25% away to be on the safe side. So it’s a
quarter for the Government and three quarters for you. That’s what you can have as your
dividend income. One of the pit falls of many businesses get
into. They think there’s my profit, I’m going to take a dividend and get a tax on the dividend.
Now that’s wrong. Tax gets paid on the profit and then it’s your bit. The dividend – that
comes afterwards. Remember what I’ve just told you. It’s about estimating your tax bill.
If you want to know exactly how much tax you are going to pay send us your accounts. In the next video I’m going to talk about
How to get a dividend out of your company.

Norman Bunn

22 Comments

  1. So if I have an LTD that was making £20,000/pa gross profit

    20% Corporation Tax would be taking off leaving £16,000

    If I paid this to myself as a dividend would I not have to pay an extra 10% Tax on the Dividend?

  2. So long as the £16K dividend meant you were still a 20% UK tax payer then there is no more tax to pay. Remember that you'd probably have taken about £7.5K as a salary before any dividends, so if you had no other earnings then you'd be fine adding the salary and £16K dividend. Hope this helps – Graham

  3. Hi Graham. Why the amount of salary that we pay our self should be 7.5 k as a owner of limited company?

  4. Hi Antonio,

    There are 2 reasons for operating a salary before taking dividends. Dividends are paid after corporation tax of 20%. If you used dividends for your annual tax free allowance then you would pay about £1800-00 more tax than if you took it as a salary. Secondly, dividends are outside the scope of national insurance so you would not be qualifying for the state pension. To get pension qualification you need "earned" income e.g. a a salary or being self-employed. Best Wishes Graham.

  5. As mentioned below – dividends are tax free to you as an individual as long as you remain a basic rate tax payer which effectively means earning under £40K per year to use round numbers.

  6. Thank you Graham. You are so helpful. How much salary we should pay ourselves is I have a company with a gross profit of 2.5k and want to be qualify for a full state pension?

  7. If we pay our self 7.5k per year is there going to be any PAYE tax and NI on the salary?

  8. Hi Antonio,

    There is no PAYE or national insurance actually owing on a salary of about £7.5K per annum (assuming you are not receiving income elsewhere). If your company is only making £2.5K profit per annum, then you might want to consider whether this is the most beneficial type of structure. Take a look at one of my other videos on different structures for the business. You need a salary near to £7.5K to qualify for pension contributions. Email me and I'll explain how with associated fees.

  9. Hi Graham thank you for your help. I wanted to ask the tax structure about a company with 25k profit per year. And I will write you a email later. Thank you very much.

  10. No P.A.Y.E or income tax legislation exists. Can you show me some as the tax man cannot. Read the tax forms carefully. Look for the word MAYBE.
    So the tax man cannot show me any acting Legislation, or anyone else. It does not go to us, it funds wars..why are we paying it? Tax laws got brought in for a year only to fund wars. WW1 The war to end all wars, P.A.Y.E was brought in to fund WW2. SHOW ME THE LAW.

  11. It seems Like a big fat trick to me. IMPORTANT DO NOT BELIEVE ME OR ANY ONE ELSE, LOOK FOR YOURSELF. PAYE & INCOME TAX HAVE NO ENABLING LEGISLATION you tube it.

  12. does it all apply the same to those who are making money through online marketing and various online business opportunities secondary to their full time jobs?

  13. What about the minium wage £6.50, how much tax do you have to pay off that and how oftern.

  14. If I'm a sole trader say a plumber for instance and i have taken in sales 30k. My costs were 5k. Would I need to add 20% tax to my future quotes.

    How much would I have to charge as a going hourly rate to say repair a toilet. Say parts are £66.00 and I'm there for an hour my rate is say £30ph would I be charging enough to make profit and also pay tax. Whats your advice on the financials?

  15. Hi i wanna make a manufacturing company in uk and further import licence and so on.can yu plz tell me hw much tax ill pay

  16. I think I'm better off having a pro accountant go over my books each year. less fuss. got about £30,000 and own my own home. going to invest. that will keep me afloat for a while long as I work hard at my home job.

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